Making a Balance Sheet Useful

Balance Sheets Don’t Always Tell the Whole Truth

The reported assets on a balance sheet almost never tell the whole story of the capital invested in a business. Accounting rules are full of loopholes that company management can exploit to hide issues and obscure the true amount of capital they’ve invested in a business over its lifetime.

For example, Unisys Corporation (UIS) recorded a $4.1 billion loss on its benefits plan as other comprehensive income/loss on the balance sheet in 2014. If this loss had been treated as a loss of equity and recorded in invested capital, Unisys’ invested capital would have been artificially lowered and its ROIC boosted to 10%. However, we add back this loss to account for the true amount of capital invested into Unisys. As a result, Unisys’ invested capital is much higher and its ROIC is much lower, sitting at just 3% — far below its cost of capital of 9%. Accordingly, the company’s stock price is down over 30% year to date.

There are countless other examples of how footnotes diligence could have given investors a clear picture of which companies were worth investing money into in 2014.

We’ve compiled a “Top 11” list of the companies (who have already filed for 2014) with the largest adjustments to their balance sheets across the 11 adjustments we make.